Thursday, August 13, 2015

China devalues yuan for third straight day

China devalues yuan for third straight day, adding to fears of currency war

Central bank weakens currency further by 1.1% after previous official cuts that put global financial markets on edge

China
cut the reference rate for its currency for the third straight day on
Thursday, after the surprise devaluation of the yuan this week unsettled
global financial markets.

The central bank put the yuan’s
central parity rate at 6.4010 yuan for US$1, the China Foreign Exchange
Trade System said, a drop of 1.11% from the previous day’s 6.3306.

It
was also lower than Wednesday’s close and comes after China adopted a
more market-oriented method of calculating the currency rate in a move
widely seen as a devaluation.

The cuts have put financial markets
on edge, sparking worries of a “currency war” as other countries feel
pressure to devalue and raising questions about the health of the
world’s second-largest economy, where growth is already slowing

European
stock markets in London, Frankfurt and Paris closed lower on Wednesday
on worries China’s economy is struggling more than previously thought.
But US stocks overcame early weakness and finished mostly higher.

Asian markets were mixed on Thursday but China’s benchmark Shanghai index was up 0.74% by mid-morning.

China
keeps a tight grip on the yuan, allowing it to fluctuate up or down
just 2% on either side of the reference rate, which it sets daily.

The
People’s Bank of China (PBoC) on Tuesday announced a “one-time
correction” of nearly 2% in the yuan’s value against the greenback as it
changed the mechanism.

Previously it had said it based the
fixing on a poll of market-makers, but declared it would now also take
into account the previous day’s close, foreign exchange supply and
demand and the rates of major currencies.

China stuns financial markets by devaluing yuan for second day runningRead moreIt
has since lowered the central rate twice more, and the week’s combined
drop is the biggest since China set up its modern foreign exchange
system in 1994 when it devalued the yuan by 33% at a stroke.

Analysts
viewed the move as a way for China to both boost exports by making its
goods cheaper abroad and push economic reforms as it seeks to become one
of the reserve currencies in the International Monetary Fund’s SDR
(special drawing rights) group.

But the volatility in the
normally unusually stable unit has raised concerns, and Bloomberg News
reported on Wednesday that the central bank had intervened in the market
to prop it up.

PBoC economist Ma Jun said on Wednesday that China could stabilise the yuan through direct market intervention.

“The
central bank, if necessary, is fully capable of stabilising the
exchange rate through direct intervention in the foreign exchange market
to avoid [the] herd mentality resulting in irrational movements of the
rate,” Ma was quoted as saying by the official Xinhua news agency.

He
also dismissed the possibility that China was seeking to wage a
currency war, saying there was no need as exports were expected to pick
up in the second half of the year. “China does not have the need to
start a currency war to gain advantage,” he said.